United Parcel Service Appears Benefit From Strong Secular Trends
It’s earnings season, which typically means an abnormal amount of volatility in the markets as new results and guidance rolls in. However, thus far during the first quarter reporting, we’ve seen relatively tepid share price movement, especially after strong beats and raises. This seems to imply that strong sales and earnings growth has already been priced into the market. And, this theory makes a lot of sense, being that we’re coming out of the COVID-19 recession and the re-opening of the economy should generate some of the best gross domestic product growth that the United States has seen in a very long time. However, there was one major exception to this trend this week. United Parcel Service (UPS) posted great numbers on Tuesday, which sent the stock soaring more than 11%.
UPS has made a habit of beating Wall Street estimates in recent quarters. After its Q4 results which were posted back in early February, Daniel Foelber, a 4-star Nobias analyst from The Motley Fool, highlighted the results saying, “The earning beat caps off a terrific year for the package delivery stock. Shares of UPS trounced the market last year, producing a 44% total return compared to the market's 17%.”
It’s true that from October of 2020 through April 26th of 2021, EPS shares hovered in a relatively tight range, trading in the $170’s. And this may come as a surprise to many because as Foelber mentioned in his recent article, the company set many records during 2020. He said, “UPS earned a record-high $84.6 billion in revenue, up 14.2% year over year (YoY). Adjusted operating profit was $8.7 billion, up 7% YoY. Diluted adjusted earnings per share (EPS) finished the year at a record-high $8.23. And the company paid a record-high $3.6 billion in dividends. Its dividend now yields 2.5%.”
Foelber also hypothesized that what was holding back UPS shares moving forward was the unknown associated with whether or not the heavy investments that the company has made in the last few years with regard to expanding its logistics operations and attempting to make them more efficient would pay out. He said, “UPS's performance, and potentially its stock price, will depend on the effectiveness of last year's spending more so than this year's. UPS paid a hefty price to expand its faster shipping network and beef up its logistics to handle the vaccine rollout. The extent to which it can capitalize on those efforts could ultimately determine its growth over the next few years.” And, arriving at the Q1 results, it appears that the market totally underestimated UPS’s ability to capitalize on those investments and therefore, its overall growth potential in 2021.
The outsized volatility that shares posted after Q1 results this week caught the attention to investors, analysts, and commentators alike. UPS was one of the most publicized stocks this week, with the Nobias algorithm recognizing dozens of reports on the stock. And, with that in mind, we wanted to highlight the opinions provided by the highest quality analysts (only those rated 4 and 5-stars by the Nobias system) for readers who’re wondering what to make of the big move UPS shares.
During the first quarter, UPS posted revenues of $22.91 billion, which beat consensus analyst expectations across Wall Street by $2.17 billion and represented a 27% year-over-year sales increase. UPS’s Q1 earnings-per-share came in at $2.77 on a non-GAAP basis and $5.47 on a GAAP basis. These two figures beat the consensus Wall Street estimates by $1.05 and $3.79, respectively. This GAAP earnings-per-share result was up 393% year-over-year (and up 141% on an adjusted basis). The company’s consolidated operating profits totaled $2.8 billion, representing 158% year-over-year growth (and up 164% on an adjusted basis). During Q1, UPS saw average daily volumes increase by 14.3% year-over-year.
In the United States domestic segment, UPS’s sales increased by 22.3%, led by strength in small and medium businesses. The company’s average price-per-package increased by 10.2%, which led to higher margins for the segment, with operating margin coming in at 9.7% (domestic operating margin was up 10.4% during the quarter on an adjusted basis). Internationally, UPS’s average daily volume increased by 23.1% with led to revenue growth of 36.2%. The company said that its package volumes increased in all of its operating regions, though the big sales growth was driven primarily by strength in Asia and Europe. UPS’s operating margin came in at 23.6% for the international segment (up 23.7% of an adjusted basis).
United Parcel Service’s senior management came out incredibly bullish on the quarterly results. During the earnings report, the company’s CEO, Carol Tome’ was quoted as saying, “I want to thank all UPSers for delivering what matters, including COVID-19 vaccines. During the quarter, we continued to execute our strategy under the better not bigger framework, which enabled us to win the best opportunities in the market and drove record financial results.”
5-star Nobias analyst, Lou Whiteman, of The Motley Fool, was also bullish on the results, concluding the introduction of his recent UPS article by saying, “The company is seeing strong revenue growth across all segments and improving pricing power, leading to the beat.” To a certain extent, Whiteman noted that these stellar Q1 results were very predictable, because it was obvious that UPS was going to be a major beneficiary of the economic recovery since the pandemic lows.
When COVID-19 first struck during Q1 of 2020, the worldwide economy essentially shut down. And, when commerce stopped, the logistics space suffered. And yet, eCommerce was one of the big winners of the pandemic period, with consumers stuck at home and reluctant to venture out into the public. Shipping players like UPS benefited from eCommerce growth with higher business-to-consumer (B2C) volumes and now that the economy is reopening, its business to business (B2B) volumes have increased nicely as well.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
There has been fear amongst investors that logistics players like UPS would not be able to sustain the growth related to the re-opening and/or the change of consumer habits during the pandemic related to eCommerce, and therefore, any near-term growth would appear to be isolated instead of secular. But, Whiteman is of the belief that UPS’s post-pandemic growth will be long lasting, saying, “With each passing quarter evidence is growing that UPS and its rivals are likely to be able to generate strong margins on the domestic business even after the pandemic recedes, thanks to strong demand, streamlined costs, and better asset utilization. Investors are understandably excited about this business.”
Sean Sechler, a 4-star Nobias analyst who writes for Entrepeneur.com, highlighted similar bullish sentiment in his recent article, saying, “While some investors might think that the uptick in e-commerce shipping was only a short-term boost driven by the pandemic, the truth is that e-commerce volumes have been increasing each year for a while now and that likely won’t be changing anytime soon.”
With this in mind, it appears that the investments that UPS management has made are proving to the well worth the costs. Without them, the company would not be in the situation that it is in today, able to take advantage of rising global shipping demand. In short, the risk incurred was certainly worth the reward and UPS investors are experiencing nice gains become of management’s foresight.
Disclosure: Nicholas Ward has no position in any equity mentioned in this article.. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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